Audit committee minimum standards: UK Corporate Governance Code 2024

Published: 26 November 2024

5 minute read

In this focused In Conversation podcast episode, Adam Mohamed, Head of Communications at the FRC, discusses the new minimum standards for audit committees with Elizabeth Richards, a Project Director in the Audit Market Supervision team. They explore the evolving landscape of corporate governance, highlighting the FRC's approach to standardising audit committee practices for FTSE 350 and premium listed companies.

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Transcript

0:13
Hello and welcome to this in conversation episode here at the FRC.

0:18
My name is Adam Mohamed, I'm the Head of Communications here at the FRC.

0:22
And today we are in one of our episodes dedicated to the UK corporate governance code because the revised code comes into effect from January 2025.

0:33
And today specifically we're talking about minimum standards for audit committees.

0:38
And luckily enough, I'm joined by Elizabeth Richards, who's a project Director in our audit market supervision team, who is our resident expert here.

0:45
So thank you, Elizabeth, for joining me.

0:48
Thank you.

0:48
Hi, nice to join you.

0:50
So to kick us off, I think some people might be asking themselves where is the linkage here between the corporate governance code and minimum standard for audit committees?

1:00
Can you help us elucidate that?

1:02
Yes, of course, the Corporate Governance Code has long had a section about audit, specifically external audit.

1:09
And that's because external audit is very important in corporate governance and the role the audit committees play in acting as a bridge between the companies subject to the Corporate Governance Code and external auditors is extremely important.

1:26
So this time around with the new version of the Corporate Governance Code, we've actually referred to the minimum standard in a of new provisions which are comply or explain around the minimum standard.

1:38
So that's the linkage is 2 new provisions.

1:42
Fantastic.

1:43
So following on from that, I mean why is there a minimum standard for audit committees?

1:48
The Competition and Markets Authority did a market study for statutory audit a number of years ago now and made some recommendations.

1:57
Those concerned mandating a minimum standard for audit committees, the FRC monitoring compliance with the standard, for example, being able to obtain information from companies about their audit tenders, etcetera.

2:11
And for the FRC to take remedial action for breaches of the standard in extreme situations such as right waiting to audit committees if there were deficiencies, indeed, writing to shareholders with helpful information to help them challenge their auditors and their audit committees.

2:28
And of course, we're waiting for legislation at the moment.

2:31
But in the meantime, we've still been working very hard on getting the minimum standard up to speed.

2:36
And that includes, but is not limited to mentioning it in the new Corporate governance Code.

2:42
You mentioned there that obviously we're waiting for legislation.

2:44
So I guess that means that this is voluntary as it stands.

2:48
When did the minimum standard come into effect in this voluntary capacity?

2:52
Minimum standard was published in May 2023.

2:56
We suggest that audit committees of FTSE 350 companies follow the standard.

3:02
You've said already, Adam, that the new corporate governance Code comes into effect in January 2025 and that will make the minimum standard Comply or explain.

3:12
So we've been doing a lot of work and in fact we've recently looked at 100 company reports to see whether companies are voluntarily and prematurely applying the standard.

3:23
And we find some encouraging findings from that work.

3:27
So it means that people are in a good place for, as you say, when the UK comes into effect, you know, the fact that they've already been starting to look at this.

3:36
So what's covered by the minimum standard?

3:39
The minimum standard is focused on external audit.

3:42
Therefore, it includes the topics you'd expect to see around tendering audit committees, oversight of the external auditor, and reporting by audit committees.

3:53
But but we need to bear in mind that the vast majority of the content of the minimum standard was in pre-existing material.

4:01
It was in old versions of the corporate governance code or other FRC guidance.

4:07
The only new aspects really in the minimum standard are references to non BIG4 audit firms being considered.

4:17
And of course that goes back to the objective of diversifying the audit market.

4:22
The minimum standard isn't a long read.

4:24
It's only 6 pages, pretty easy to digest, and I'd recommend that anyone interested in this takes a good look at it and I think they'll be reassured.

4:34
You mentioned that that it's kind of been taken from items that were previously in the corporate governance code.

4:41
I wonder if you could take, maybe just take us through a bit of the reasoning for that repositioning.

4:46
Repositioning was justified by the CMA, the Competition and Markets Authority recommendation about having a minimum standard and collecting the information together from different sources from previous versions of the corporate governance code and guidance into one single document and badging it as a minimum standard gives it extra status if you like.

5:10
It's a single resource document, so it's convenient for all parties interested in this area to look at it when they're considering the performance of audit committees.

5:21
Brilliant.

5:21
So in terms of who it applies to, obviously audit committees across the board, but which audit committee specifically are in scope of the minimum studies?

5:31
The introduction to the minimum standard refers to audit committees in companies in the Footsie 350 because the minimum standard has been integrated with the corporate governance Code.

5:44
In fact, all premium listed companies will have to soon comply or explain against the minimum standard.

5:51
And if we have any future legislation, then of course that will also dictate the scope of the mandatory application of the minimum standard.

6:00
But what I'd also add is because of the topics that are covered in the minimum standard, companies who are subject to mandatory tendering and rotation of their external auditors would benefit from following it anyway, whether or not they're within the FTSE 350.

6:18
And of course, companies who aspire to join the FTSE 350 are wise to start to comply with the standards earlier rather than later, and that includes the minimum standard for audit committees now.

6:32
So you mentioned that obviously that this is already applicable to those in the FTSE three 50s.

6:38
Are you saying that companies are already aware of the standard?

6:42
Yes, we are.

6:43
It's pleasing to see that in a number of annual reports, companies are already referring to the minimum standard.

6:52
So we recently looked at 100 annual reports covering companies in the FTSE 100, FTSE 200 and small cap companies.

7:01
And it was reassuring to see that nearly half of those, so it's just under 50 companies, are already referring to the minimum standard in their annual reports.

7:12
17 out of 100 companies say that they already fully or partially follow the standard.

7:18
And a number of companies also refer to gap analysis that they're doing so that they can benchmark where they are now as opposed to the changes they would have to make in order to fully comply with the standard.

7:32
So they're moving in the right direction and companies are, for example, mentioning the minimum standard in the terms of reference for their audit committees.

7:40
So awareness is growing.

7:43
That's brilliant.

7:43
So as you mentioned before, really encouraging signs there.

7:46
So looking to the future then, and I guess we've touched on it a little bit, obviously with the introduction of the revised code, what's the next step for the standard?

7:56
What are our plans?

7:57
Well, of course we'll be eagerly awaiting legislation, but there are other things we can do as well.

8:03
So every year we will be looking at a different group of 100 companies annual reports to see what they say about following the standard.

8:13
The corporate governance code will allow companies to comply or explain against the standard.

8:20
So we'll be looking at explanations for non compliance to see how companies are setting out how they reach the objectives of the standard in a different way.

8:30
And part of our published supervisory strategy for 2023 to 2026 says that we will develop an approach for the minimum standard that goes beyond annual reports.

8:42
So that's something that we're thinking about as well.

8:46
Well, it sounds like we will probably be speaking again, I guess, in the not too distant future about the minimum standard.

8:52
So thank you very much, Elizabeth, for taking us through this canter through the minimum standard and how the linkage is there between the minimum standard and the corporate governance code.

9:01
Thank you to everyone listening.

9:03
I recommend that you head to the FRC website where you can find the other podcasts in this series.

9:09
Thank you very much.

9:10
Thank you, Adam.